OCSL

Business Context and Reporting Period

Company: Fifth Street Finance Corp. (Note: Input metadata referenced "Oaktree," but the filing text is for Fifth Street Finance Corp.)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2010
Business Overview: Fifth Street is an externally managed, closed-end, non-diversified management investment company operating as a Business Development Company (BDC) and a Regulated Investment Company (RIC). It invests primarily in debt securities of small and mid-sized companies, often in connection with private equity sponsors. The company also operates a Small Business Investment Company (SBIC) subsidiary licensed by the SBA.

Key Financial Metrics

Material Changes vs. Prior Period

• Investment Portfolio Growth: Total investments at fair value increased from $299.6 million (Sept 30, 2009) to $494.8 million (June 30, 2010), driven by significant capital raises and new investments.
• Income Growth: Net investment income for the nine months ended June 30, 2010, increased by $8.1 million (33.9%) compared to the same period in 2009, primarily due to a larger portfolio of outstanding debt investments.
• Expense Increases: Total expenses for the nine months ended June 30, 2010, rose to $18.9 million (net of waivers) from $13.8 million in the prior year period, reflecting higher management and incentive fees due to asset growth.
• Realized Losses: The company recorded net realized losses of $2.8 million for the nine months ended June 30, 2010, compared to $12.4 million in the prior year period. The 2010 losses were primarily related to the sale of a portion of the interest in CPAC, Inc.
• Unrealized Depreciation: Net unrealized depreciation on investments was $11.7 million for the nine months ended June 30, 2010, compared to $12.7 million in the prior year period.
• Capital Raises: The company completed multiple follow-on public offerings in the period, raising approximately $179.1 million in net proceeds from the issuance of common stock.

Guidance, Outlook, Risks, and Unusual Items

• Outlook: Management expects to grow the business by increasing average investment sizes and focusing more on first-lien transactions and floating-rate facilities with rate floors. The company anticipates accessing the remaining half of its $75 million SBA capital commitment in the fourth fiscal quarter of 2010.
• Dividends: The company intends to distribute between 90% and 100% of taxable income to maintain RIC status. Dividends declared for the quarter ended June 30, 2010, were $0.32 per share.
• SBIC Leverage: The SBIC subsidiary has $35 million of SBA-guaranteed debentures outstanding. The company is seeking exemptive relief from the SEC to exclude this debt from the 200% asset coverage test required for BDCs.
• Credit Facilities: The company has a $100 million Wells Fargo facility and a $90 million ING facility. As of June 30, 2010, there were no borrowings outstanding under these facilities, though substantially all assets (excluding SBIC assets) are pledged as collateral.
• Asset Quality: Six investments were on non-accrual status (cash or PIK) as of June 30, 2010. The company has modified payment terms for ten portfolio companies due to economic conditions, which may limit interest income recognition.
• Valuation Risk: Investments are valued at fair value by the Board of Directors. A hypothetical 100 basis point change in discount rates could impact net assets from operations by approximately $11 million.

Key Facts for Investor Verification

• Company Identity: Verify that the filing is for Fifth Street Finance Corp. (Ticker: FSC), not Oaktree Specialty Lending Corp., as indicated in the input metadata.
• Non-Accrual Status: Review the specific portfolio companies on non-accrual status (e.g., Lighting by Gregory, Martini Park, Premier Trailer Leasing) and the impact on future cash flows.
• SBIC Regulatory Status: Confirm the timeline for the SBA examination required to access the remaining $40 million of the SBA capital commitment.
• Collateral Pledges: Note that substantially all assets are pledged under credit facilities; verify the terms and covenants of the Wells Fargo and ING facilities.
• Fee Waivers: The investment adviser permanently waived the base management fee on cash and cash equivalents starting March 31, 2010, and waived approximately $727,000 for the quarter ended Dec 31, 2009.